READ THIS: Scroll down to review a complete list of the
articles - Click on the blue-coloured
text!Bookmark this Page - and SHARE IT with Others!

The role of foreign direct investment (FDI) in promoting growth
and sustainable development has never been substantiated. There isn't even an
agreed definition of the beast. In most developing countries, other capital
flows - such as remittances - are larger and more predictable than FDI and ODA
(Official Development Assistance).

Several studies indicate that domestic investment projects have
more beneficial trickle-down effects on local economies. Be that as it may,
close to two-thirds of FDI is among rich countries and in the form of mergers
and acquisitions (M&A). All said and done, FDI constitutes a mere 2% of global
GDP.

FDI does not automatically translate to net foreign exchange
inflows. To start with, many multinational and transnational "investors" borrow
money locally at favorable interest rates and thus finance their projects. This
constitutes unfair competition with local firms and crowds the domestic private
sector out of the credit markets, displacing its investments in the process.

Many transnational corporations are net consumers of savings,
draining the local pool and leaving other entrepreneurs high and dry. Foreign
banks tend to collude in this reallocation of financial wherewithal by
exclusively catering to the needs of the less risky segments of the business
scene (read: foreign investors).

Additionally, the more profitable the project, the smaller the
net inflow of foreign funds. In some developing countries, profits repatriated
by multinationals exceed total FDI. This untoward outcome is exacerbated by
principal and interest repayments where investments are financed with debt and
by the outflow of royalties, dividends, and fees. This is not to mention the
sucking sound produced by quasi-legal and outright illegal practices such as
transfer pricing and other mutations of creative accounting.

Moreover, most developing countries are no longer in need of
foreign exchange. "Third and fourth world" countries control three quarters of
the global pool of foreign exchange reserves. The "poor" (the South) now lend to
the rich (the North) and are in the enviable position of net creditors. The West
drains the bulk of the savings of the South and East, mostly in order to finance
the insatiable consumption of its denizens and to prop up a variety of
indigenous asset bubbles.

Still, as any first year student of orthodox economics would tell
you, FDI is not about foreign exchange. FDI encourages the transfer of
management skills, intellectual property, and technology. It creates jobs and
improves the quality of goods and services produced in the economy. Above all,
it gives a boost to the export sector.

All more or less true. Yet, the proponents of FDI get their
causes and effects in a tangle. FDI does not foster growth and stability. It
follows both. Foreign investors are attracted to success stories, they are drawn
to countries already growing, politically stable, and with a sizable purchasing
power.

Foreign investors of all stripes jump ship with the first sign of
contagion, unrest, and declining fortunes. In this respect, FDI and portfolio
investment are equally unreliable. Studies have demonstrated how multinationals
hurry to repatriate earnings and repay inter-firm loans with the early
harbingers of trouble. FDI is, therefore, partly pro-cyclical.

What about employment? Is FDI the panacea it is made out to be?

Far from it. Foreign-owned projects are capital-intensive and
labor-efficient. They invest in machinery and intellectual property, not in
wages. Skilled workers get paid well above the local norm, all others languish.
Most multinationals employ subcontractors and these, to do their job, frequently
haul entire workforces across continents. The natives rarely benefit and when
they do find employment it is short-term and badly paid. M&A, which, as you may
recall, constitute 60-70% of all FDI are notorious for inexorably generating job
losses.

FDI buttresses the government's budgetary bottom line but
developing countries invariably being governed by kleptocracies, most of the
money tends to vanish in deep pockets, greased palms, and Swiss or Cypriot bank
accounts. Such "contributions" to the hitherto impoverished economy tend to
inflate asset bubbles (mainly in real estate) and prolong unsustainable and
pernicious consumption booms followed by painful busts.

This material is copyrighted. Free, unrestricted use is allowed on a non
commercial basis.The author's name and a link to this Website
must be incorporated inany
reproduction of the material for any use and by any means.